25 October 2013
Successful businesses know their numbers, understand them and act upon them
If you’re struggling on your business numbers, our partner Johnny Martin has a few explanations to help.
Comfortably one of the biggest pains for entrepreneurs running a business is getting to grips with the all the financial and business jargon, not to mention the numbers.
Sometimes it’s really difficult to understand just what it is your accountant is trying to explain to you. And the problem is made worse because often different words are used to describe the same thing e.g. sales, revenue, turnover all refer to the same thing!
Part of this problem is that a number of American words have come over to the UK – so while in the UK we usually talk about debtors (money owed by customers) in the US this is known as Receivables (actually much clearer).
So how can you easily and quickly get up to speed on the jargon? Well, the good news is that there aren’t too many words you need to know - my guess is no more than 60 and you could nail that in two weeks if you did 5 a day!
So let’s looks at 5 words now which I have taken from my glossary.
Costs – there are two kinds of costs in your business. Fixed costs (also known as overhead) that do not change significantly with the level of sales. Examples would be rent, marketing, office costs. Then there are costs that vary with the level of sales and these are usually the “ingredients” costs of your product ie in a sandwich business the bread, eggs, mayo etc. These “ingredients” costs can be referred to as direct costs or cost of sales.
Gross profit – if you take your sales and deduct the “ingredients” costs above you get Gross Profit. Its important to know/measure Gross Profit as this is your value added – for example you took the bread/mayo etc and turned it into a more valuable sandwich.
EBIT – getting a bit more technical here (as the boiler repairer would say!) – this stands for Earnings (which means profit) before interest and tax. It is useful to know the profit before interest and tax so you can compare profit irrespective of the level of borrowing or interest rates and tax. You arrive at EBIT after taking overheads off your gross profit.
Depreciation – this is an accounting entry to spread the cost of a piece of equipment over its useful life. Why do this? Well if you put all the cost of say a new computer in the month it was bought, that wouldn’t be a fair reflection of its useage. So say the computer cost £360 and lets say its useful life is 3 years, then the cost would be spread at £10 per month for 36 months in the profit & loss report. However in the cash flow you would see £360 going out of the bank in the month it was bought.
EBITDA – so that explains what EBITDA is – it is EBIT with depreciation and amortisation (similar to depreciation) added back. Investors use this as an approximation for your cash flow.
So that’s your first 5 - do let me know if you have any words you would like explained.
Johnny Martin runs a monthly workshop, Get Cash Flow Confident, in the Centre. Find out how you can get your numbers under control at the next workshop.